Any Permian Fall-Off For Helmerich & Payne Is Shallow, Jefferies Says In Upgrade

Investor pessimism on oil & gas well drilling company Helmerich & Payne, Inc. HP is unfounded, according to an analyst at Jefferies.

The Analyst

Analyst Brad Handler upgraded Helmerich & Payne from Hold to Buy following a 13-percent pullback in the past month. The analyst upped his price target from $72 to $80.

The Thesis

Since mid-May, shares of land drillers are down 21 percent, as investors fret over potential Permian activity decline and the recent oil weakness, Handler said in a Tuesday note.

• The analyst believes any Permian fall-off to be shallow and limited to the second half of the year. The modest hit the analyst is foreseeing is based on five factors, namely:
• Permian takeaway capacity growth expected by 2H19
• Higher WTI oil price
• A sold-out super-spec rig market
• A small proportion of a well cost coming from drilling
• Below-peer average Private operator exposure in the Permian

The analyst noted that U.S. land drilling fundamentals remain strong, while he expects upside to its forward-year estimates for Helmerich & Payne from pricing/margin.

There is unlikely to be risk to dividend, given the company's willingness to raise its net debt-to-cap ratio.

"…..HP retains best-in-class exposure to a super-spec rig market that should tighten further and allow for strong FCF inflection through the next 24 months," Handler said. Additionally, Jefferies said Helmerich & Payne's valuation is reasonable relative to "high-quality" oilfield services peers.

The Price Action

Reacting to the upgrade, shares ignored a weak start and rallied higher in early trading. The stock was up 1.25 percent to $64.67 at time of writing.

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